5 Examples for a Financing Strategy for a Small Business
Are you thinking of growing your small business or launching a start-up? In that case, you have to explore different financing options to see which suits you best. It is important to have a sound financial plan and strategy depending on what your short-term and long-term goals are. Without this financial strategy you cannot determine the extent of financing you will need.
- Bank Loans: Small businesses can consider borrowing from banks to raise capital. You will find that most reputed banks provide loan packages from small businesses. These will have higher interest rates than mortgages but these are far lower if you compare them with rates offered by credit cards. You can get either lines of credit or direct loans but both require you to get the loans against collaterals like your own home or a property you own. Getting bank loans has always been a most reliable option for startups. But with the 2008 economic recession that hit the world, loans are now granted only to parties that can prove their credibility.
- Credit Cards: When getting money from banks is not an option, you can use your credit card. However, the biggest downside is the high interest rate attached with any credit card. You can sometimes negotiate the interest rate with credit card providers. Moreover, when you use personal credit cards for your business you become liable for all debts that you incur. So, as a startup owner, you can run into a lot of debts in trying to get the startup off the ground.
- Venture Capital: With VC loans, that are similar to bank loans, you can get funds for your small business. So, you borrow some funds from groups of investors in return for their ownership interest in your enterprise. Since the VCs have a stake in your company they are motivated to work hard. But, despite the easy availability of funds, angel investors or venture capitalists choose businesses rather selectively. They may even forget about the smaller ones and typically choose the ones with provable ideas, protectable intellectual property, high return prospects, and high growth potential. It is good to have VCs on board because they offer myriad financial resources, accurate forecasts, managerial capabilities, focused business ideas, and business models that small enterprises usually lack. However, equity financing has its share of disadvantages; smaller businesses have to give up control like management decisions. Unlike bank financing, VCs will control the relationship until they sell all their shares. You can buy shares using leverage which is actually an efficient use of trading capital. and you can trade larger through it.
- Crowdfunding: The Internet, social media, and technology have led to this new financing strategy called crowdfunding. With technology, you can now connect to anyone at any time, create content, and get money across borders. In crowdfunding, small amounts of funds are raised from large groups through crowdfunding platforms. The biggest advantages are flexibility and quick turnaround. But the downside is that not all businesses are meant for crowdfunding.
- Business competition/Shark Tank competitions: This is quite the rage these days and more and more countries and organizations are hosting such events to allow businesses to make their pitch to potential investors. These events not only help you to get monetary investments but also reach out to investors who are keen to help you to expand the business.
So, the best ways of financing your small business will require you to conduct extensive research and analysis. You must evaluate your long-term business goals and then decide which of these financial options works best for you, since each has its share of upsides and downsides.